Australian central bank raises cash rate target by 25 bps to 3.35%

07 Feb '23

2 min read

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The Reserve Bank of Australia’s monetary policy board recently raised the cash rate target by 25 basis points to 3.35 per cent. It also increased the interest rate on exchange settlement balances by 25 basis points to 3.25 per cent, central bank governor Philip Lowe announced. Inflation was 6.9 per cent in underlying terms—higher than expected, he said.

Consumer price index-based (CPI) inflation over the year to the December quarter was 7.8 per cent, the highest since 1990. Global factors explain much of this high inflation, but strong domestic demand is adding to the inflationary pressures in a number of areas of the economy, Lowe said in a statement.

Inflation is expected to decline this year due to both global factors and slower growth in domestic demand. The central forecast is for CPI inflation to decline to 4.75 per cent this year and to around 3 per cent by mid-2025. Medium-term inflation expectations remain well anchored, and it is important that this remains the case.

The Australian economy grew strongly over 2022. The central forecast is little changed from three months ago, with GDP growth expected to slow to around 1.5 per cent over 2023 and 2024.

The recovery in spending on services following the lifting of COVID restrictions has largely run its course and the tighter financial conditions will constrain spending more broadly, he said.

The labour market remains very tight. The unemployment rate has been steady at around 3.5 per cent over recent months, the lowest rate since 1974. Job vacancies and job advertisements are both at very high levels, but have declined a little recently.

Many firms continue to experience difficulty hiring workers, although some report a recent easing in labour shortages. As economic growth slows, unemployment is expected to increase. The central forecast is for the unemployment rate to increase to 3.75 per cent by the end of this year and 4.5 per cent by mid-2025, Lowe said.

The board’s priority is to return inflation to target. It wants to return inflation to the 2-3 per cent range while keeping the economy on an even keel, but the path to achieving a soft landing remains a narrow one, he said.

The board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary, he added.

Fibre2Fashion News Desk (DS)

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